Chapter 3 - HMRC tax regime: benefits, reliefs and overseas schemes Flashcards
A serious ill-health lump sum can be paid from:
a.crystallised funds and uncrystallised funds regardless of the member’s age.
b.crystallised and uncrystallised funds, but only where the member has not reached the age of 75.
c.uncrystallised funds only regardless of the member’s age.
d.uncrystallised funds only, but only where the member has not reached the age of 75.
c.uncrystallised funds only regardless of the member’s age.
A serious ill-health lump sum can only be paid out of uncrystallised funds.
A serious ill-health lump sum is a relevant lump sum and a RBCE. Its payment does not reduce the member’s LSA, but it is tested against their LSDBA.
Member is under age 75
- The payment is made tax-free up to the member’s remaining LSDBA.
-Payments in excess of their remaining LSDBA are taxable as the member’s pension income via PAYE.
Member is over age 75
- The whole serious ill-health lump sum is taxable as the member’s pension income via PAYE
Chapter reference 3A1E
Tim applied for enhanced protection on 5 April 2006, although when he crystallised his benefits in 2024/25 his enhanced protection no longer applied. This is most likely to be because:
a.he crystallised his benefits after the age of 75.
b.the value of his benefits had fallen below £1,073,100.
c.he had accrued benefits in a pension scheme between 6 April 2006 and 5 April 2023.
d.following his divorce his pension savings were subject to a pension debit as a result of a pension sharing order.
c. he had accrued benefits in a pension scheme between 6 April 2006 and 5 April 2023.
When enhanced protection was introduced, the individual must have stopped being an active member of all approved pension schemes no later than 5 April 2006. This meant that no further relevant benefit accrual was allowed in a registered pension scheme after this date. If relevant benefit accrual did occur, enhanced protection would be lost
Chapter reference 3C2
Samir died in May 2024 at the age of 58. In July 2024 his widow received the death benefits from his employer’s defined benefit scheme as a lump sum death benefit of £480,000 plus a dependant’s scheme pension of £30,000 p.a. What is the amount that will be tested against Samir’s lump sum and death benefit allowance?
a.£600,000.
b.£480,000.
c.£750,000.
d.£1.08m.
b.£480,000.
payment is a RBCE so there is a test against the member’s remaining LSDBA where the:
* member was under age 75 when they died.
* it is paid out within the two year window.
If the payment is made within the two-year window, it is checked against the the
member’s remaining LSDBA
Chapter reference 3B1B
Why might someone applying for fixed protection 2016 in November 2024 be told they are ineligible?
a.They applied after 5 April 2019.
b.Their pension benefits were valued at greater than £1.25m as at 5 April 2016.
c.Their pension benefits were valued at less than £1m as at 5 April 2016.
d.They already hold enhanced protection.
d.They already hold enhanced protection.
On 6 April 2016 the LTA was reduced again from £1.25 million down to £1 million, adversely
affecting individuals who had accrued pension rights in excess
of £1 million. These individuals can apply for fixed protection 2016.
Those with primary protection, enhanced protection or either form of fixed protection can not apply for fixed protection 2016.
fixed protection 2016 protects an
individual’s benefits up to a value of £1.25 million. Allowing a tax-free cash lump sum of up to 25% of £1.25 million, i.e. £312,500.
Chapter reference 3C3C
The money purchase annual allowance is only triggered in respect of a scheme pension when it is paid directly from a defined contribution arrangement where fewer than:
a.twelve other members, excluding dependants, are receiving a scheme pension.
b.eleven other members, including dependants, are receiving a scheme pension.
c.eleven other members, excluding dependants, are receiving a scheme pension.
d.twelve other members, including dependants, are receiving a scheme pension.
c.eleven other members, excluding dependants, are receiving a scheme pension.
Once in payment the scheme pension income is taxed as the member’s pension income
via PAYE.
Receiving a scheme pension does not usually trigger the MPAA. The MPAA is only triggered when it is paid directly from a defined contribution arrangement where fewer than eleven other members (including dependants) are receiving a scheme pension and the member
became eligible to receive it on or after 6 April 2015.
Chapter reference 3A2A
An employee died on 1 March 2024 but his previous employer’s pension scheme was not notified of his death until 1 December 2024. To avoid the lump sum death benefits payable from becoming taxable, the scheme must distribute these no later than:
a.30 November 2025.
b.30 November 2026.
c.28 February 2025.
d.28 February 2026.
b.30 November 2026.
Two-year window
This is the time within which the death benefits must be ‘designated’ to an income producing contract or paid out as a lump-sum death benefit. It starts from the date the
scheme administrator is notified of the death or, if earlier, the date they could reasonably be expected to know of the death.
Chapter reference 3B
Legislation has been introduced to increase the normal minimum pension age to 57 on 6 April 2028. Members of registered pension schemes who had an unqualified right to take their benefits from the scheme before the age of 57 will still be able to do so as long as they had this right on or before:
a.5 April 2021.
b.5 April 2022.
c.4 November 2021.
d.4 November 2022.
c.4 November 2021.
The Finance Act 2022 includes legislation to increase the normal minimum pension age from 55 to 57.
Schemes will be free to decide how and when to move to the new minimum pension age, as long as this is in place by 6 April 2028.
The legislation protects members of registered pension schemes who, on or before 4 November 2021, had an unqualified right to take their benefits from the scheme before the age of 57
Chapter reference 3A
Chi died in July 2024 at the age of 80 with a personal pension plan valued at £250,000. Her nominated beneficiary was her granddaughter Li Na. If Li Na decides to take the entire fund as a lump sum in September 2024, the payment will be:
a.subject to the special lump sum death benefits charge of 45% and there is no test against Chi’s remaining lump sum and death benefit allowance.
b.taxable as her pension income via PAYE and is also subject to a check against Chi’s remaining lump sum and death benefit allowance.
c.subject to the special lump sum death benefits charge of 45% and is also subject to a check against Chi’s remaining lump sum and death benefit allowance.
d.taxable as her pension income via PAYE and there is no test against Chi’s remaining lump sum and death benefit allowance.
d.taxable as her pension income via PAYE and there is no test against Chi’s remaining lump sum and death benefit allowance.
The payment of an uncrystallised funds lump-sum death benefit is a RBCE. Thus there will be a test against the member’s remaining LSDBA where:
* member was under age 75 when they died.
* lump-sum death benefit is paid within the two year window.
Death of the member
aged 75 or older
* when paid directly to the beneficiary – taxable as the recipient’s income via PAYE
* There is no test against the member’s remaining LSDBA.
Chapter reference 3B1A
The investments held in Sadiq’s self-invested personal pension [SIPP] include directly held shares in FTSE 100 companies. How much Capital Gains Tax [CGT] if any, will the SIPP pay on any gains made when these shares are sold?
a.20% on any gains that exceed the trust CGT exemption.
b.None.
c.10% on any gains that exceed the trust CGT exemption.
d.20% on all gains.
b.None.
The taxation of registered pension scheme investment funds is as follows.
- no liability to income tax arises in respect of income derived from investments or deposits.
- no CGT arises on gains and there is no allowance for losses.
- trading income is taxable.
Chapter reference 3D
On 6 April 2006, Dan’s executive pension plan [EPP] fund was valued at £250,000 and his tax-free cash entitlement on this date was also £250,000. Dan decides to take the benefits from his EPP in July 2024 when the fund is valued at £720,000. The value of the fund on 5 April 2023 was £670,000. How much can Dan take as a tax-free lump sum?
a.£180,000.
b.£720,000.
c.£250,000.
d.£670,000.
d.£670,000.
Prior to 6 April 2006, it was possible for a member’s total lump sum rights to equal their total pension rights. In other words, they were eligible to take all of their benefits as a tax-free cash lump sum. This is known as a standalone lump sum.
Prior to 6 April 2023, there was no limit to the amount of standalone lump sum that could be paid.
From 6 April 2023, the tax-free element of the standalone lump sum is limited to the value that could have been paid on 5 April 2023.
Chapter reference 3C8
Alicia crystallised her personal pension of £820,000 in 2019. She took the maximum PCLS of £205,000 and used the balance to purchase a lifetime annuity that included 100% annuity protection in respect of all capital used to purchase the lifetime annuity.
On her death in June 2024 at the age of 72, Alicia had received gross pension income of £92,250. How much will Alicia’s beneficiaries receive?
Alicia’s beneficiaries will receive:
- original purchase price = £820,000 – £205,000 = £615,000; less
- gross annuity income received to date of death = £92,250; equals
* £522,750
There will be no tax charge because Alicia died before reaching the age of 75. There was no test against Alicia’s LSDBA because the lifetime annuity was
bought before 6 April 2024 (so the fund used to buy the annuity must have been crystallised before 6 April 2024).
Emily elected for primary protection. She had aggregate benefits of £2.4 million at 6 April 2006, when the lifetime allowance was £1.5 million. She decides to draw benefits in 2024/25 when the value of her benefits has increased to £3 million.
- Calculate Emily’s primary protection factor.
- Calculate Emily’s LSDBA.
Primary protection will work for Emily as follows:
(value of the individual’s pension rights on 5 April 2006 − £1.5m)/
£1.5m = Primary protection rights
- Emily’s primary protection factor will be:
((£2.4m − £1.5m)/ £1.5m) × 100% = 60%
However, reductions to the lifetime allowance (from a high of £1.8 million in 2011/12) meant that the primary protection factor would be applied to a lower value, reducing the level of protection.
Therefore, to maintain the value of primary protection at the 2011/12 levels, for BCEs under the LTA regime in the tax years 2011/12 onwards, the primary protection factor was applied to a figure of £1,800,000, known as the underpinned lifetime allowance.
From 6 April 2024, the LSDBA applies instead of the LTA. A member with primary protection will have an increased LSDBA (before any deductions). This is calculated as:
£1.8 million × the member’s primary protection factor
- Emily’s LSDBA will be: £1.8m + (£1.8m x 60%) = £2.88m
On 5 April 2006 Jennifer had total benefits valued at £1.8 million and an entitlement to PCLS of £540,000. She registered for enhanced protection.
On 5 April 2023 Jennifer’s benefits are valued at £2.3 million. She decides to draw her benefits in May 2024, when the value has increased to £2.4 million.
Calculate the maximum tax-free lump sum that Jennifer can take in May 2024.
As £540,000 exceeds £375,000, Jennifer is entitled to a higher LSA based on the percentage of the uncrystallised fund that could have been paid on 5 April 2023.
Jennifer’s tax-free lump sum represents the following percentage of her benefits:
£540,000/£1,800,000 = 30%
When she takes her benefits, her maximum tax-free lump sum will be the lower of:
- 30% × £2.4 million (the value of her fund when she takes the benefits) = £720,000
or
- 30% × £2.3 million (the value of her fund on 5 April 2023) = £690,000.
Since the value of her benefits has increased since 5 April 2023, Jennifer’s maximum tax-free lump sum is £690,000
Multi-Choice
Carole would like to commute a personal pension plan with a value of £9,500, as a small pots payment. In respect of the LSA and LSDBA, which of the following
statements are correct?
a. The payment of a small pots payment is not a RBCE.
b. Carole must have some LSA or LSDBA remaining to take the small pots payment.
c. The payment will use up £9,500 of her LSDBA.
d. A small pots payment does not trigger the MPAA
(a) and (d) are correct.
(b) is incorrect because Carole does not need to have any LSA or LSDBA remaining to take a small pots payment.
(c) is incorrect because the small pots payment of £9,500 will not use up any of her LSDBA.
Who of the following would be subject to the MPAA rules in the 2024/25 tax year?
- Declan, aged 72, who took an UFPLS in June 2022 and has not crystallised any pension benefit since this date.
- Tanya, aged 56, who crystallises a personal pension plan valued at £100,000 in May 2024 from which she receives £25,000 PCLS and then designates £75,000 to flexi-access drawdown. She then takes an income of £10,000 from her flexi-access drawdown fund in March 2025.
- Lukas, aged 65, whose only pension is a capped drawdown plan which he started in 2014. In 2024/25 the basis amount is £35,000 and he draws an income of £52,000 from the fund.
Choose from the following options.
a. 1 and 2 only.
b. 1 and 3 only.
c. 2 and 3 only.
d. 1, 2 and 3.
The correct answer is a.
Declan is subject to the MPAA rules because taking an UFPLS is a trigger event for the MPAA rules. This means he is still subject to the MPAA in 2024/25 even though no
further benefits have been crystallised.
Tanya is also subject to the MPAA rules as she first accessed the income from her flexi-access drawdown fund in 2024/25.
Lukas is not subject to the MPAA rules as he only takes an income from his capped drawdown pension fund and the income he takes is within the maximum permitted (i.e. 150% of the basis amount of £35,000 = £52,500 and he took an income of £52,000).
Bill died in June 2024 at the age of 74 while drawing an income from his capped drawdown pension fund. His fund was valued at £450,000 at the date of his death. His beneficiaries choose to take a lump-sum death benefit and it is paid in September 2024. How much will they receive?
a. £450,000
b. £337,500
c. £247,500
d. £202,500
a. £450,000.
Bill died before reaching the age of 75 and the benefits were paid out within the two year window. Therefore, the payment is tax-free, so his beneficiaries will receive the full £450,000.
